HERB GREENBERG'S BUSINESS INSIDER -- The Truth and Wisdom of Buying Into Bankrupt Companies / Also, have investors hugely overreacted to Bay Networks?

Herb Greenberg

Published 4:00 am, Wednesday, March 27, 1996

Yesterday's item on the Discovery Zone and the common trap investors in bankrupt companies can fall into prompted Marilyn W. to write: "Investing in companies that just filed for bankruptcy isn't ALWAYS a no-no, is it? We talked ourselves out of investing in Broadway when it fell to $2, and could have made a bundle. We are considering a similar investment now . . . what should we look out for?"

Losing your life's savings.

Let's go over this one more time.

Most companies that slip into bankruptcy eventually deem their old stock worthless, and replace it with new stock. If holders of the old stock are lucky, as part of the reorganization they'll get a tiny piece of the new stock. Also, you won't know how the deal will be structured until the reorganization is approved by the bankruptcy court, a process that can take months.

At Broadway Stores, each share in the old Carter Hawley Hale was swapped for less than 1/10th of a share of the new stock, plus a fraction of a warrant -- and it proved a lousy investment. The Broadway stock you passed up at 2 was the new stock.

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Fast-forward to another bankruptcy story -- Discovery Zone. If you're speculating on its recovery, George Putnam of the Boston-based Turnaround Letter says a better bet would be Discovery Zone bonds. They're currently trading for around 3 cents on the dollar, "and they would have to increase 15-fold before stockholders get anything."

But based on the company's financials, professional bankruptcy traders aren't salivating over the investment.

All you need to know is that Viacom owns 49 percent of Discovery Zone's stock, and in conjunction with the bankruptcy filing its CEO, Sumner Redstone, and his chief deputy, resigned from Discovery Zone's board. Viacom gave no explanation for the move, but Putnam says you usually see big investors walk "because they realize there's no way to get value down to all of the creditors and stockholders."

Still, some investors are perpetually either naive or optimistic. Yesterday Discovery Zone's stock actually rose 1/32 to close at 2 3/32.

Do investors in the original stock of bankrupt companies ever do well? Sure, but rarely. One exception was Pleasanton-based Hexcel, whose original stock has doubled in valued since the company emerged from bankruptcy. "But odds are overwhelmingly against you," Putnam says. "Ninety nine out of 100 go the other way."

While most computer-networking stocks fell to some degree over concerns of a sales slowdown, BayNet took the biggest hit. Most of its slide appeared to be related to an announcement yesterday by Anixter International -- BayNet's largest distributor -- that European sales were slowing down.

Investors immediately interpreted that to mean BayNet's European business was also hitting the skids.

BayNet officials couldn't be reached, but one of my best sources says that no less than three BayNet executives told him that little of the company's European business goes through Anixter, and that Anixter's European problems are related to Anixter -- not BayNet. The kicker: Europe is where the BayNet execs claim they're doing best.

-- Internet insanity: After reading my recent column about the pending initial public offerings of such Internet search engines as Yahoo, Lycos and Excite, a reader -- we'll call her Gigi -- decided she wants to get in on the ground floor of one of these deals.

She just can't make up her mind which one to buy, and writes: "Can IPOs be purchased online, and if so, how can I verify whether they will be available through E- Trade (or any other online brokerage)? If the answer is negative, what's the best and most direct way for me to buy IPO shares (and is there typically a minimum investment)?"

Gigi, most of us can only buy an IPO after it starts trading. And then you can buy it through any broker -- even the electronic ones. But forget trying to get in on the good ones before they actually start trading. And if a broker approaches you with an opportunity to get in on an IPO, you should assume that either the favored clients (institutions, wealthy investors) passed it up -- and that usually means you should, too -- or that you're being hustled by a penny- stock broker, in which case you should hold onto your wallet.

-- Speaking of search engines: If you use the Internet, you no doubt have discovered that not all search engines are created equal. I've found, for example, that I have better luck with Infoseek than Yahoo. But maybe it's just me (and if it is, it wouldn't be the first time!). In any event, in light of the coming public offering of Yahoo & Co., I thought I'd ask this column's readers to pass along the name of their favorite search engines, and why? As usual, I'll let you know the results.

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